Need help with personal investing advice

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Need help with personal investing advice

Postby boglenerd » Wed Apr 03, 2013 10:04 am

Hi all,

I am looking for an advice related to investment. Here is the situation

Myself:
Male, 33, in NY area. Annual income 160k (base) + 50k (bonus). Job is in a software development company, pretty safe with very good benefits. I am guessing a ~10% annual raise (on combined base + bonus) in future.

Spouse:
Female, 30, does not work. We have a 4 year old daughter. Wife takes care of her and I am perfectly fine with her not working (at least for now).

Financial situation (investment):

- Have a house (zillow shows estimated at ~$350k, more or less correct), current mortgage $275k at 3.875% for 30 years. Current monthly mayment (with escrow for property taxes) is ~$2100.
- I max out my 401k and the company contributes $7750 per year. Current balance is ~155k with 70% in VINIX and 30% in VIDMX. All future 401k contributions (mine as well as company's) are set to go to these 2 funds with 2/3rd in VINIX and 1/3rd in VIDMX. I plan to continue maxing this out in future as long as I can.
- I have a ROTH IRA at Vanguard that I contributed 5k per year (max limit on a ROTH IRA) for the last 3 years. So, I contributed 15k in total. Out of which $10k is in VTTHX and $5k in VDMIX. The current balance is ~17.5k.
- Exact same thing for my wife. Invested 15k in the exact same funds and current balance ~17.5k. Total ROTH IRA balance ~35k. As much as I would like to keep contributing there, looks like my income for year 2013 is going to be out of the contribution limit to the ROTH IRA account.
- A brokerage account opened ~6 months ago. Invested 45k, current value ~50k. I want to invest only in stock with long tem capital appreciation, so I own PEP, KO, BRK-B, MSFT, WFC, WMT and DTV. I invested 10k each in WFC and BRK-B and 5k each in the other ones.
- Emergency fund with 40k in cash, earning almost nothing.
- Term insurance worth ~1.2M
- Long term disability insurance (in addition to what the company provides)

Financial situation (expenses):

- After taxes withholding, 401k contribution, commuting cost etc, I get 8000 at the end of the month. Fixed monthly expances 4.5k, so that leaves 3.5k per month (42k annually).
- Bonus, after removing taxes, say 25k, paid once a year. So, I have total 67k left at my disposal. I would like to keep 6-7k a year for vacation and 10k for home things (furniture, hobbies, unplanned expense). That still leaves 50k a year to be parked somewhere.

Questions:
1. Is there anything in the current scenario that you suggest needs change or anything that you would have done differently?
2. What is the right thing to do with the 60k yearly thing. Here are the options.
- Put in brokerage and keep investing in long term stocks
- Buy a 539 plan for my daughter. I am not a fan of 539 and so haven't started one. So far my plan is to tap into the brokerage when money is needed for education (ofcourse I have to pay taxes), I am guessing 14 years from now.
- Anything better that hasn't crossed my mind.

I consider myself a beginner in investment so feel free to comment (positive or negative) as I intend to learn from the collective wisdom here. Feel free to ask any questions to get more details that may help you give a better advice.

Thanks
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Re: Need help with personal investing advice

Postby Duckie » Wed Apr 03, 2013 10:08 pm

boglenerd wrote:I max out my 401k and the company contributes $7750 per year. Current balance is ~155k with 70% in VINIX and 30% in VIDMX. All future 401k contributions (mine as well as company's) are set to go to these 2 funds with 2/3rd in VINIX and 1/3rd in VIDMX. I plan to continue maxing this out in future as long as I can.

You have no bonds (other than the piddly amount in your Roth IRAs). Why? What are you thinking? And with these two funds you're missing US mid/small caps and foreign emerging markets, small caps, and Canada. Your portfolio is incredibly not diversified. What are the options in your 401k plan?

Looks like my income for year 2013 is going to be out of the contribution limit to the ROTH IRA account.

It looks like you have just His 401k, His Roth IRA, Her Roth IRA, and taxable. That means you can easily do the 
Backdoor Roth IRA
 in the future. See 
Backdoor Roth: A Complete How-To.

-A brokerage account opened ~6 months ago. Invested 45k, current value ~50k. I want to invest only in stock with long tem capital appreciation, so I own PEP, KO, BRK-B, MSFT, WFC, WMT and DTV. I invested 10k each in WFC and BRK-B and 5k each in the other ones.

Yikes, you're all over the place. Most posters on the board are not fans of individual stocks. In taxable you'd be better off in just Total Stock Market and Total International Stock Market funds. And with TISM in taxable you could use the 
Foreign tax credit.
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Re: Need help with personal investing advice

Postby boglenerd » Thu Apr 04, 2013 8:56 am

Duckie wrote:You have no bonds (other than the piddly amount in your Roth IRAs). Why? What are you thinking? And with these two funds you're missing US mid/small caps and foreign emerging markets, small caps, and Canada. Your portfolio is incredibly not diversified. What are the options in your 401k plan?

The way I am looking at this, is that I have a very long time horizon (25-30 years) and want to take advantage of that in the stock market. I am diversified in the stock market but I agree not diversified in the asset class as a whole. In my 401k plan, I have option of VINIX, VIDMX, VBTIX, VMCIX, VSCIX, VMRXX, VEXRX, PTTRX along with some other target retirement funds

Duckie wrote:It looks like you have just His 401k, His Roth IRA, Her Roth IRA, and taxable. That means you can easily do the 
Backdoor Roth IRA
 in the future. See 
Backdoor Roth: A Complete How-To.

Yes, I have heard about that option, will definitely look into it. As far as I understand, it works by putting money into a traditional IRA (non-deductible) and then convert that to roth IRA. What I don't understand is that if I put 5k in the trad ira, after paying taxes, won't my roth IRA have less than 5k (after paying the tax from that money)? To get maximum advantage of this mechanism, should I put more than 5k in the trad non-deductible IRA, so that even after deducting taxes, it remains 5k?

Yikes, you're all over the place. Most posters on the board are not fans of individual stocks. In taxable you'd be better off in just Total Stock Market and Total International Stock Market funds. And with TISM in taxable you could use the 
Foreign tax credit.

Hmm...I understand what you are saying. Assuming, I want to invest in individual stocks, should I use a tax advantaged account (in my case roth IRA)?
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Re: Need help with personal investing advice

Postby Grt2bOutdoors » Thu Apr 04, 2013 9:30 am

You have $1.2MM in Term Life Insurance. Of that, how much is payable to your wife and how much to you?
Right now, your wife acts as homemaker and chief daycare to your daughter, should something unfortunate befall your wife, you will want some coverage to provide backup childcare and take care of other needs such as mortgage replacement, etc. Don't underestimate the value your wife provides to your household.

You live in the NY area, do you also pay NYS taxes? If so, how would you like to reduce your NYS tax liability by using the NYS 529Direct plan - that will allow you to deduct $10K from a married filing joint NYS tax return? Why look a gift horse in the mouth? They are all Vanguard funds.
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Re: Need help with personal investing advice

Postby ruralavalon » Thu Apr 04, 2013 9:32 am

Welcome to the forum :) .

Even at age 33 with good earnings its wise to hold bonds, a reasonable asset allocation would be 75/25 stocks/bonds. Benjamin Graham, legendary value investor (and mentor to Warren Buffett) suggested a minimum of 25% in bonds for even the most aggressive investor, Wiki article link: Asset Allocation . Also, please see -- poll viewtopic.php?f=10&t=101010 ; and regression viewtopic.php?p=1217243#p1217243 .

Adding a modest amount of bonds can greatly decrease portfolio volatility with only a relatively small impact on overall portfolio growth, see graph -- http://www.youngresearch.com/wp-content ... ontier.jpg .

Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX) would be a good choice for a bond holding in your 401k.

To further diversify your domestic equities in the 401k, adding either Vanguard Small-Cap Index Fund Institutional Shares (VSCIX), or Vanguard Mid-Cap Index Fund Institutional Shares (VMCIX), or both would be good. Wiki article link: Approximating Total Stock Market

Your choice of 2/3 domestic equity to 1/3 international equity is a nice allocation.

You could improve your international diversification by adding Vanguard Emerging Mkts Stock Idx Adm (VEMAX). This could be a good use for that extra ~ $50k/yr, even in a taxable account as its very tax efficient. About a 3:1 ratio between developed and emerging should approximate total int'l market.

If you really want holdings of individual stocks (which is very UNdiversified), keep that a very limited part of your overall portfolio (say less than 5% or 10%). Thats currently at about 20% of your portfolio, which is too high in my opinion.

Better diversification brings reduced risk, so improve your diversification wherever you can.

I hope that this helps.
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Re: Need help with personal investing advice

Postby Duckie » Thu Apr 04, 2013 8:09 pm

boglenerd wrote:What I don't understand is that if I put 5k in the trad ira, after paying taxes, won't my roth IRA have less than 5k (after paying the tax from that money)? To get maximum advantage of this mechanism, should I put more than 5k in the trad non-deductible IRA, so that even after deducting taxes, it remains 5k?

You aren't allowed to put in more than the maximum (which at your age is $5.5K for 2013). If in May 2013 you make a $5.5K non-deductible contribution to a traditional IRA and a couple of days later convert the entire amount to a Roth IRA, any earnings will be negligible. If there is a small gain it will be listed on Form 8606 and will transfer over to Form 1040. The extra tax, if any, is paid out of taxable funds, not the IRA.
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Re: Need help with personal investing advice

Postby boglenerd » Thu Apr 04, 2013 10:11 pm

Grt2bOutdoors wrote:You have $1.2MM in Term Life Insurance. Of that, how much is payable to your wife and how much to you?
Right now, your wife acts as homemaker and chief daycare to your daughter, should something unfortunate befall your wife, you will want some coverage to provide backup childcare and take care of other needs such as mortgage replacement, etc. Don't underestimate the value your wife provides to your household.

I think I should explain more. I have 200k provided by the company and the extra ~1.1M I have taken supplemental from the same company (because of the low premium I have to pay). I think the life insurance is always payable to the beneficiary (in this case my wife), how can it be paid to myself (if I am dead)? What am I missing?

You live in the NY area, do you also pay NYS taxes? If so, how would you like to reduce your NYS tax liability by using the NYS 529Direct plan - that will allow you to deduct $10K from a married filing joint NYS tax return? Why look a gift horse in the mouth? They are all Vanguard funds.

I am a resident of NJ and work in NY, so I pay NY taxes on my income. Does that make me eligible for the tax deduction? If yes does this mean I can deduct from NY state taxes every year upto 10k of my contribution to NY 529 plan? Sorry, I know very little about the tax benefits of 529 plans.
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Re: Need help with personal investing advice

Postby boglenerd » Thu Apr 04, 2013 10:22 pm

ruralavalon wrote:Even at age 33 with good earnings its wise to hold bonds, a reasonable asset allocation would be 75/25 stocks/bonds. Benjamin Graham, legendary value investor (and mentor to Warren Buffett) suggested a minimum of 25% in bonds for even the most aggressive investor, Wiki article link: Asset Allocation . Also, please see -- poll viewtopic.php?f=10&t=101010 ; and regression viewtopic.php?p=1217243#p1217243 .

I agree with you, at the very least I am going to do a 25% of my 401k allocation to bonds using the VBTIX option.

You could improve your international diversification by adding Vanguard Emerging Mkts Stock Idx Adm (VEMAX). This could be a good use for that extra ~ $50k/yr, even in a taxable account as its very tax efficient. About a 3:1 ratio between developed and emerging should approximate total int'l market.

Based on the options available in my 401k, can you please suggest me a portfolio?

If you really want holdings of individual stocks (which is very UNdiversified), keep that a very limited part of your overall portfolio (say less than 5% or 10%). Thats currently at about 20% of your portfolio, which is too high in my opinion.

Better diversification brings reduced risk, so improve your diversification wherever you can.

I appreciate your advice on this. The thing is it also reduces the return on investment. But I'll keep in mind to keep the individual stocks to a minimum. Since I am only going to invest in very stable companies, I think I would like my cap to be 20%.
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Re: Need help with personal investing advice

Postby boglenerd » Thu Apr 04, 2013 10:24 pm

Duckie wrote:You aren't allowed to put in more than the maximum (which at your age is $5.5K for 2013). If in May 2013 you make a $5.5K non-deductible contribution to a traditional IRA and a couple of days later convert the entire amount to a Roth IRA, any earnings will be negligible. If there is a small gain it will be listed on Form 8606 and will transfer over to Form 1040. The extra tax, if any, is paid out of taxable funds, not the IRA.

You are right, I did not realize the non-deductible IRA is going to be funded with after tax money, so after conversion to roth TRA, the only taxes are to be paid on the gain (which will be very minimal).
As far as I know to contribute in non-deductible IRA, you have to have earned income. Does that mean I can only invest in one for myself and not for my wife (because currently she is not working)?
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Re: Need help with personal investing advice

Postby xram » Thu Apr 04, 2013 11:59 pm

boglenerd wrote:
Duckie wrote:You aren't allowed to put in more than the maximum (which at your age is $5.5K for 2013). If in May 2013 you make a $5.5K non-deductible contribution to a traditional IRA and a couple of days later convert the entire amount to a Roth IRA, any earnings will be negligible. If there is a small gain it will be listed on Form 8606 and will transfer over to Form 1040. The extra tax, if any, is paid out of taxable funds, not the IRA.

You are right, I did not realize the non-deductible IRA is going to be funded with after tax money, so after conversion to roth TRA, the only taxes are to be paid on the gain (which will be very minimal).
As far as I know to contribute in non-deductible IRA, you have to have earned income. Does that mean I can only invest in one for myself and not for my wife (because currently she is not working)?


You can do one for her as well.
I do one for my wife every year for the last 4 years.
She is stay at home mom
Good luck
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Re: Need help with personal investing advice

Postby ruralavalon » Fri Apr 05, 2013 8:39 am

Here is a portfolio idea for your consideration, with a 75/25 stock/bond allocation, with 1/3 of stocks in international (which results in 50% domestic equity, 25% int'l equity, 25% bonds). This will give you broader diversification (to reduce risk) than you presently have, and still have very low investing expenses (for good net gains). Although there are no total stock market or total international funds in your 401k, you do have several very nice options offered in your 401k so there are probably several good ways to do this. All percentages and dollar amounts are rounded off, so they may not add up exactly.

401k (65%; $155k; adds $17.5k/yr plus $7.7k from employer)
24%, $96k, Vanguard Institutional Index I (VINIX), er = 0.04%
05%, $36k, Vanguard Small-Cap Index Fund Institutional Shares (VSCIX), er = 0.08%
Try for ~ 5:1 ratio VINIX/VSCIX, Wiki article link: Approximating Total Stock Market
25%, $60k, Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX), er = 0.07%
11%, $43k, Vanguard Developed Markets Index I (VIDMX), er = 0.07%

His Roth IRA (07%; $17.5k; adds $5.5k/yr)
04%, $10k, Vanguard Emerging Mkts Stock Idx Adm (VEMAX), er = 0.18%,
03%, $7.5k, Vanguard FTSE All-World ex-US Small-Cap Index Fund Investor Shares (VFSVX), er = 0.45%
Try for ~ 10/3/3 ratio VIDMX/VEMAX/VFSVX, Wiki article link: Approximating Total International Stock Market .

Her Roth IRA (07%; $17.5k; adds $5.5k/yr)
07%, $17.5k, Vanguard Total Intl Stock Index Admiral (VTIAX), er = 0.16%

Taxable accounts (21%, $50k; add $??/yr)
21%, $50k, misc individual stocks, <= domestic stocks already owned
00%, $00, Vanguard Total Intl Stock Index Admiral (VTIAX), er = 0.16%, <= very tax efficient, ~ 1/3 new taxable contribitions here
00%, $00, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), er = 0.06%, <= very tax efficient, ~ 2/3 new taxable contribitions here
Wiki article link: Principles of Tax-Efficient Fund Placement

Management of the portfolio will require periodic rebalancing (every year or so) because different assets will appreciate at different rates, Wiki article link: Rebalancing . Rebalancing should be done in a tax protected account to avoid creating tax liability, so you will want to have all major asset types in your largest tax protected account to facilitate that. The 401k is your largest tax protected account, and will continue to be the largest because it will recieve the largest contributions. This is why I suggest holding some domestic equity, international equity and bonds all in the 401k, even though that will make things a little more complicated elsewhere.

EDIT: I still want to discourage you from having so much of your portfolio in indvidual stocks, as that is poor diversification. Please see -- Wiki article link: Getting Started ; and http://www.norstad.org/finance/total.html . If you want individual stocks, something like BRK-B (which you do own) is more diversified than others as it is an aggregation of businesses in various different sectors.

I hope that this helps.
Last edited by ruralavalon on Fri Apr 05, 2013 9:40 am, edited 6 times in total.
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Re: Need help with personal investing advice

Postby Grt2bOutdoors » Fri Apr 05, 2013 8:48 am

boglenerd wrote:
Grt2bOutdoors wrote:You have $1.2MM in Term Life Insurance. Of that, how much is payable to your wife and how much to you?
Right now, your wife acts as homemaker and chief daycare to your daughter, should something unfortunate befall your wife, you will want some coverage to provide backup childcare and take care of other needs such as mortgage replacement, etc. Don't underestimate the value your wife provides to your household.

I think I should explain more. I have 200k provided by the company and the extra ~1.1M I have taken supplemental from the same company (because of the low premium I have to pay). I think the life insurance is always payable to the beneficiary (in this case my wife), how can it be paid to myself (if I am dead)? What am I missing?
You are assuming that the deceased will be you. Now, if your wife dies tomorrow, do you have a life insurance policy for her payable to you where you will receive money? If the answer is no, then I highly suggest you look into obtaining a policy for her payable to you as beneficiary. The reasoning is simple - she currently provides full-time daycare to your child and house-cleaning/cooking services. If your wife was gone tomorrow, do you have any idea how much "good" daycare costs in NJ - let me enlighten you - anywhere from $1,400 - $1,800 a month. That is an awful amount of cash to be shelling out from your salary plus your other expenses. See where I am going - the price of an insurance policy will be minimal compared to the piece of mind should something unfortunate befall you or her.

You live in the NY area, do you also pay NYS taxes? If so, how would you like to reduce your NYS tax liability by using the NYS 529Direct plan - that will allow you to deduct $10K from a married filing joint NYS tax return? Why look a gift horse in the mouth? They are all Vanguard funds.

I am a resident of NJ and work in NY, so I pay NY taxes on my income. Does that make me eligible for the tax deduction? If yes does this mean I can deduct from NY state taxes every year upto 10k of my contribution to NY 529 plan? Sorry, I know very little about the tax benefits of 529 plans.
You could because you pay NYS taxes up to $5K, however since you live in NJ, the tax benefit received in NY will offset the benefit of the NYS tax credit you receive against your NJ tax liability - so in the end it is kind of a wash. However, if you in the future decide to open a separate account for college savings, you should consider the lowest cost 529 plans out there and avoid NJ's like the plague (it's terrible and high cost)
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Re: Need help with personal investing advice

Postby Duckie » Fri Apr 05, 2013 7:02 pm

boglenerd wrote:As far as I know to contribute in non-deductible IRA, you have to have earned income. Does that mean I can only invest in one for myself and not for my wife (because currently she is not working)?

As long as you file your taxes as Married Filing Jointly and have enough income, you are allowed to contribute to a Spousal IRA (either traditional or Roth) up to the maximum of $5.5K for 2013. See IRS Publication 590 - Spousal IRA.
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Re: Need help with personal investing advice

Postby sometimesinvestor » Sat Apr 06, 2013 2:15 pm

The New York State wording on tax benefits of its 529 plan is not perfectly clear but here is what it says
Contributions by an Account Owner are deductible in computing
the Account Owner’s New York taxable income for New York
personal income tax purposes in an amount not to exceed $5,000
($10,000 for spouses filing joint tax returns) taken together for all
contributions by an Account Owner to all Accounts of the Account
Owner in any particular taxable year (and only to the extent not
deductible or eligible for credit for federal income tax purposes).
Contributions may be subject to recapture in certain circumstances.

While others have suggested individual stocks are not a great idea because of diversification I have as big a problem with your selections. WFC is I believe Buffets biggest stock hold so holding Berkshire and WFC is certainly riskier then owning either one and say Exxon (Not an endorsement of Exxon) Similarly if diet soda is found to cause camcer in people (many years ago that was suggested as true for rats) both KO and PEP will do badly.
If you want to have individual stocks in your portfolio (I have between 5% 10% which is high but for me comortable ) I suggest choosing among the stock pairs I mentioned and substituting a drug or biotech company and an energy company for the dropped financial and beverage companies
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